Hodgkiss Corporation is evaluating an extra dividend versus a share repurchase.

Question

Hodgkiss Corporation is evaluating an extra dividend versus a share repurchase. In either case, $22,000 would be spent. Current earnings are $3.70 per share, and the stock currently sells for $91 per share. There are 4,000 shares outstanding. Ignore taxes and other imperfections.

What will the company’s EPS and PE ratio be under the two different scenarios? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Dividend per share = $22000 / 4000 shares

= $5.5

Stock price after dividend = $91 - $5.5

= $85.5

Price earnings ratio = $85.5 / $3.70

= 23.11.

Share repurchased = $22000 / $91

= 241.76 shares

EPS = $3.70 (4000 shares) / (4000 - 241.76)

= $3.93

Price earnings ratio = $91 / $3.93

=23.15.

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